With IBD Business Model Threatened, Who Wants to Buy One?

With talk of the possible sale of the AIG Advisor Group and Cetera, insiders share their views on the state of indie brokerage business

As billionaire investor Carl Icahn pressures AIG to break up its different parts, speculation continues as to which firm might purchase the AIG Advisor Group, which includes the independent broker-dealers FSC Securities, Royal Alliance, SagePoint Financial and Woodbury Financial.

“Reps on a recent Woodbury conference call informed me that numerous private equity firms are making very attractive offers to AIG,” said recruiter Jon Henschen in an interview Thursday with ThinkAdvisor. “The Advisor Group should go for the highest price and to the firm offering the best retention [deal] for reps.”

Meanwhile, the Cetera Financial Group of IBDs, which Lightyear Capital sold to now-troubled RCS Capital for $1.15 billion in 2014, appears to be on the auction block as well.

But does buying a group of IBDs make sense in the current economic and regulatory climate? “I think the traditional IBD model is under threat,” said Chip Roame, head of the consultancy Tiburon Strategic Advisors, in an interview.

“There is still a flow of financial advisors to independence and many of them are hybrids, which should bode well for the IBDs,” Roame explained. “But the costs of compliance, technology and recruiting are increasing. Plus the Department of Labor’s [proposed] fiduciary rule and a likely follow-on rule from the SEC add enormous risk to the IBD model, more so even than to the wirehouse model.”

Ouch!

“Most everything seems to be working against broker-dealer profitability, except higher money-market rates,” said Henschen. Money-market investment vehicles historically brought in up to half of profits for independent broker-dealers, he adds. (That percentage is less for wirehouse firms, which have more diverse revenue streams.)

The Federal Reserve raised rates on Wednesday by 25 basis points, the first hike since 2008.

“If the total rate hike is 50-75 basis points for the next year or so, that won’t help much. Broker-dealers will take anything they can get, but they want to make a couple percent [on money markets] at least,” the recruiter explained.

According to Roame, the leading IBDs have been “evolving quickly to look more like wirehouses and/or custodians.” For instance, they’ve focused on retaining higher-end fee-based FAs.

As for who might buy the AIG Advisor Group, “LPL Financial makes a lot of sense as a buyer here,” he said. “It could eliminate many costs.”

In Henschen’s view, the buyer would look to merge the four IBDs and move to a self-clearing model “to improve cost efficiencies.”

The view that Lightyear wants to buy the AIG IBDs “is an interesting theory,” Roame said. “I guess I would be surprised to see such a move. Lightyear got in and out on Cetera with great timing. I am not sure they’d flip the AIG IBDs for the same price appreciation. [And] I am not sure who would be the buyer a few years later.”

AIG, Lightyear and LPL declined to comment on the matter. A call to RCS Capital was not returned as of press time.